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Self-study quiz and Exercises with
Answers' Keys
Chapter 6 - The Money Supply and
the Federal Reserve System
April 2011
14) When the manager of a department store attaches price tags to his/her products, he/she is
using money as a
A) medium of exchange.
B) store of value.
C) unit of transfer.
D) unit of account.
Answer: D
15) Circuit City, a retailer of electronics, has 2,000 different products in inventory. Circuit
City reports its inventory is worth $12 million. This is an example of using money as a
A) medium of exchange.
B) unit of account.
C) standard of deferred payment.
D) store of value.
Answer: B
16) Dennys lists the price of a Grand Slam Breakfast at $4.99 a plate. Listing the price on the
menu
is an example of money serving as a(n)
A) store of value.
B) unit of account.
C) medium of exchange.
D) investment good.
Answer: B
17) When Mexico experiences a period of high inflation and Mexicans lose confidence in
their peso as a store of value, which of the following would be most likely to occur?
A) The demand for pesos would increase.
B) The buying power of the peso would increase.
C) The value of foreign currencies would depreciate relative to the peso.
D) Mexicans would use a different currency as a medium of exchange.
Answer: D
18) A currency that is not backed by gold, silver, or any other precious commodity equal to
the face value of the money is known as
A) fake money.
B) weak money.
C) token money.
D) commodity money.
Answer: C
19) After World War II, cigarettes were used as money in Germany. This is an example of
A) fiat money.
B) legal money.
C) token money.
D) commodity money.
Answer: D
20) The U.S. dollar is an example of fiat money because
A) it is the strongest currency in the world.
B) it is the most widely used currency in international trade.
Answer: D
27) Transaction money is
A) M1.
B) M2.
C) M3.
D) M4.
Answer: A
28) Travelers checks are
A) not money.
B) included in M1 and M2.
C) not included in M2.
D) not included in M1.
Answer: B
29) Which of the following is included in M2, but not included in M1?
A) currency held outside banks
B) travelers checks
C) demand deposits
D) savings accounts
Answer: D
30) Jaime transfers $2,500 from his checking account to his savings account. This transaction
will
A) decrease both M1 and M2.
B) not change M1 and decrease M2.
C) decrease M1 and not change M2.
D) increase both M1 and M2.
Answer: C
31) Ruby transfers $700 from her saving account to her checking account. This transaction
will
A) increase M1 and not change M2.
B) not change M1 and decrease M2.
C) increase both M1 and M2.
D) decrease both M1 and M2.
Answer: A
32) Teddy transfers $175 from his money market fund to his checking account. This
transaction will
A) decrease M2 and increase M1.
B) increase M1, but leave M2 unchanged.
C) decrease M1 and increase M2.
D) decrease both M1 and M2.
Answer: B
33) Which of the following would NOT be counted as part of M1?
A) demand deposits
B) travelers check
C) money market accounts
D) currency
Answer: C
34) Saving account balances are included in
A) M1.
B) M2.
C) neither M1 nor M2.
D) both M1 and M2.
Answer: B
2 True/False
1) When you use money to fill your car with gas every week, you are using money as a unit of
account.
Answer: FALSE
2) Money is anything that generally is accepted as a medium of exchange.
Answer: TRUE
3) In an economy that uses fiat money, there is no need for double coincidence of wants.
Answer: TRUE
4) When you take $100 from your saving account and deposit it in your checking account, M2
decreases.
Answer: FALSE
5) If all banks are loaned up and so will not make further loans, a $1,000 deposit creates
$1,000 in
new money.
Answer: FALSE
6) Fiat money is money the government says is money.
Answer: TRUE
7) The M1 definition of money includes money market accounts.
Answer: FALSE
8) The M2 definition of money includes demand deposits.
Answer: TRUE
10.2 How Banks Create Money
1) Napoli National Bank has liabilities of $3 million and net worth of $200,000. Napoli
National Banks assets are
A) $200,000.
B) $3 million
C) $3.2 million.
D) $2.8 million.
Answer: C
2) Saturn County Savings and Loan has liabilities of $400,000 and net worth of $125,000.
Saturn
County Savings and Loans assets are
A) $525,000.
B) $275,000.
C) $400,000.
D) $125,000.
Answer: A
3) Thompson National Trust has assets of $500,000 and liabilities of $400,000. Thompson
National Trusts net worth is
A) $900,000.
B) $400,000.
C) $100,000.
D) $500,000.
Answer: C
4) A commercial bank lists
A) loans as liabilities.
B) deposits as liabilities.
10) Refer to Table 10.1. The required reserve ratio is 25%. If the First Charter Bank is
meeting its reserve requirement and has no excess reserves, its reserves equal
A) $100.
B) $200.
C) $600.
D) $300.
Answer: B
11) Refer to Table 10.1. The required reserve ratio is 25%. If the First Charter Bank is
meeting its
reserve requirement and has no excess reserves, its loans equal
A) $900.
B) $1,000.
C) $600.
D) $1,800.
Answer: B
12) Refer to Table 10.1. First Charter Banks total assets are
A) $1,200.
B) $400.
C) $800.
D) $2,400
Answer: A
Refer to the information provided in Table 10.2 below to answer the questions that follow.
Table 10.2
13) Refer to Table 10.2. First Commercial Banks excess reserves equal $________.
A) 600,000
B) 1,000,000
C) 200,000
D) 1,500,000
Answer: A
14) Refer to Table 10.2. The required reserve ratio
A) is 5%.
B) is 10%.
C) is 20%.
D) cannot be determined from the given information.
Answer: B
15) Refer to Table 10.2. First Commercial Banks total loans equal $________.
A) 1,000,000
B) 5,000,000
C) 2,500,000
D) 1,700,000.
Answer: D
Refer to the information provided in Table 10.3 below to answer the questions that follow.
Table 10.3
16) Refer to Table 10.3. The net worth of Peoples Bank is $________.
A) 1,000,000
B) 200,000
C) 800,000
D) 300,000
Answer: D
17) Refer to Table 10.3. The required reserve ratio is
A) 25%.
B) 20%.
C) 50%.
D) 10%.
Answer: B
18) Refer to Table 10.3. Peoples Bank excess reserves are $________.
A) 200,000
B) 100,000
C) 300,000
D) 400,000
Answer: A
19) Refer to Table 10.3. Total loans of Peoples Bank equal $________.
A) 100,000
B) 400,000
C) 500,000
D) 800,000
Answer: C
20) Crescent City Bank has $200 million in deposits. Crescent City Bank is meeting its
reserve
requirement and has no excess reserves. It has $40 million in reserves. Crescent City Bank
faces
a required reserve ratio of
A) 5%.
B) 4%.
C) 20%.
D) 25%.
Answer: C
21) Narnia National Bank has $750 million in deposits. The required reserve ratio is 30%.
Narnia
National Bank must keep ________ in reserves.
A) $125 million
B) $150 million
C) $225 million
D) $250 million
Answer: C
22) Neon Bank has $300 million in deposits. The required reserve ratio is 25%. Neon Bank
must
keep ________ in reserves.
A) $275 million
B) $145 million
C) $75 million
D) $120 million
Answer: C
23) The Intracoastal Bank has $5 million in deposits and $500,000 in reserves. If the required
reserve ratio is 5%, excess reserves are equal to
A) $125,000.
B) $500,000.
C) zero.
D) $250,000.
Answer: D
24) The Bank of Arugula has $9 million in deposits and $900,000 in reserves. If the required
reserve ratio is 10%, excess reserves are equal to
A) $90,000.
B) $180,000.
C) $81,000.
D) zero.
Answer: D
25) The Bank of Red Oak has $2 million in deposits and $400,000 in reserves. If excess
reserves are
equal to $100,000, the required reserve ratio is
A) 15%.
B) 10%.
C) 20%.
D) 5%.
Answer: A
Refer to the information provided in Table 10.4 below to answer the questions that follow .
Table 10.4
26) Refer to Table 10.4. If the required reserve ratio is 15%, First Charter Bank
A) is loaned up.
B) has too few reserves on hand.
C) is meeting its required reserve ratio and has $200,000 in excess reserves.
D) has excess reserves of $100,000.
Answer: A
27) Refer to Table 10.4. First Charter Bank could make additional, first round loans of
$400,000 if
the required reserve ratio were
A) 10%.
B) 8%.
C) 7.5%.
D) 12%.
Answer: A
28) Refer to Table 10.4. If the required reserve ratio were changed to 5% and First Charter
Bank continues to hold $1,200,000 in reserves, its excess reserves will be
A) $600,000.
B) $1,000,000.
C) $800,000.
D) $400,000.
Answer: C
29) Dollar Bank is currently loaned up. If the required reserve ratio is lowered,
A) Dollar Banks net worth will increase.
B) Dollar Bank will have excess reserves that it can lend out.
C) Dollar Bank will still be loaned up because it did not receive any additional deposits.
D) Dollar Banks actual reserves will increase, but it will still be loaned up.
Answer: B
30) When a bank has no excess reserves, and thus can make no more loans, it is said to be
A) bankrupt.
B) ripe for a takeover.
C) in receivership.
D) loaned up.
Answer: D
2) The Federal Open Market Committee (FOMC) directs the Open Market Desk to
A) determine the required reserve ratio.
B) determine the discount rate.
C) buy or sell government securities.
D) determine the federal funds rate.
Answer: C
3) Which of the following is NOT a tool available to the Fed to change the supply of money?
A) open market operations B) the required reserve ratio
C) the money multiplier D) the discount rate
Answer: C
4) The discount rate is
A) the interest rate commercial banks charge each other for borrowing funds.
B) the interest rate commercial banks charge their new customers.
C) the interest rate the Fed charges commercial banks for borrowing funds.
D) the interest rate commercial banks charge their most creditworthy customers.
Answer: C
5) A decrease in the required reserve ratio
A) will increase the money supply. B) will decrease the money supply.
C) will not change the money supply. D) will decrease the discount rate.
Answer: A
6) Assume that all commercial banks are loaned up. Total deposits in the banking system are
$200 million. The required reserve ratio is increased. The money supply will
A) decrease.
B) increase.
C) not change because there was no change in deposits.
D) not change because the required reserve ratio has no impact on money supply.
Answer: A
7) The Fed has tended not to use changes in the reserve requirement as a means of controlling
the money supply because
A) only banks that are members of the Fed are subject to reserve requirements, and most
banks do not belong to the Fed.
B) a change in the reserve requirement has only a very small impact on the money supply.
C) it is a crude monetary policy tool because a change in the requirement does not affect
banks until about two weeks after the change is implemented.
D) it takes a long time for the Congress to approve a change in the reserve requirement.
Answer: C
8) The interest rate banks pay to borrow money from the Fed is the
A) federal funds rate.
B) discount rate.
C) prime lending rate.
D) reserve rate.
Answer: B
9) Which of the following represents an action by the Federal Reserve that is designed to
increase the money supply?
A) a decrease in the required reserve ratio
B) an increase in the discount rate
C) a decrease in federal tax rates
D) selling government securities in the open market
Answer: A
10) Which of the following represents an action by the Federal Reserve that is designed to
increase the money supply?
A) buying government securities in the open market
B) an increase in the required reserve ratio
C) a decrease in federal spending
D) an increase in the discount rate
Answer: A
11) Of the tools available to the Fed to regulate the money supply, which is the least used?
A) the federal funds rate
B) the reserve ratio
C) tax cutting
D) the open-market operations
Answer: B
12) If the Fed sells government securities, then there is
A) an increase in the supply of money.
B) a decrease in the supply of money.
C) a decrease in the discount rate.
D) an increase in the required reserve ratio.
Answer: B
13) Which of the following represents an action by the Federal Reserve that is designed to
decrease the money supply?
A) a decrease in the discount rate
B) a decrease in federal spending
C) selling government securities in the open market
D) a decrease in the required reserve ratio
Answer: C
14) When the Fed raises the required reserve ratio, the banks excess reserves will
initially________ and the money supply ________.
A) remains constant; decreases
B) decrease; decreases
C) increase; remain constant
D) increase; increases
Answer: B
15) The best instrument for controlling week-to-week changes in the money supply is
A) the required reserve ratio.
B) moral suasion.
C) open-market operations.
D) the discount rate.
Answer: C
16) Which of the following statements is FALSE?
A) Open-market operations can be used by the Federal Reserve with some precision.
B) Open-market operations are extremely flexible.
C) The Federal Reserve undertakes open-market operations on an infrequent basis.
D) Open-market operations have a fairly predictable effect on the supply of money.
Answer: C
2) A sale of government securities to the public by the Federal Reserve will increase the
money supply.
Answer: FALSE
3) The discount rate cannot be used to control the money supply with great precision because
its effects on banks demand for reserves are uncertain.
Answer: TRUE
4) The tool most frequently used by the Fed to change the money supply is changing the
required reserve ratio.
Answer: FALSE
5) If the Fed buys securities on the open market, it will increase the money supply.
Answer: TRUE